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by nostrademons
1239 days ago
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And the average retail investor pays pennies to market-makers - if a typical spread is 1-2 cents and you make 5 trades a year, you've paid between a nickel and a dime. As with advertising, when you sum up dimes across hundreds of millions of people, it becomes an appreciable amount. Particularly when you also include trades made by institutions on behalf of retail investors. Your 0.5-1.5% management fee on an actively-managed mutual fund is partially going to pay salaries for the fund manager, and partially toward brokerage commissions, spreads, etc. for the trading itself. And mutual funds care a great deal about getting liquidity when they need it, since they're in breach of contract if a flood of redemptions come in and they can't liquidate assets to pay them. (Market makers are also analogous to the credit card industry in that a small fraction of dumb people subsidize a large number of fiscally responsible people. If you get a rewards card with no annual fee and always pay it off on time, you turn a profit, paid for partially by merchant fees and partially by idiots who carry a huge balance at 25% interest rates. Similarly, if you buy-and-hold a good stock or index fund, you're making profits far in excess off what the financial industry can skim off you. The suckers are largely made up of day traders, wage slaves who can't save anything, and underfunded pension funds with principal agent problems.) |
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Good post but your management fee isn't generally paying for crossing the spread. That's extra slippage.
It may show up as tracking error in the fund (the price was 10.25/10.26, the fund had to buy, it bought at 10.26 and the index trackers said the price was 10.255, it had 0.5c of slippage). But more likely the fund traded in the closing auction, there was only one price so it officially had zero tracking error, but the price was silently a little higher than it would have been if the fund wasn't buying.